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HypOTHETICAL
1-Going Public Hypothetical –Facts/Questions |
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| SECTION 1 HOME ON LINE LINKS SEARCH TABLE CONTENTS SECTION 2 SECTION 3 SECTION 4 |
Public Offerings -- Pre-Filing Period AnimatEASE Corp. was founded by Richard Abbot, John Baker and James Charles, former employees of Micro Corp., who have developed a software application for producing animation films by non-professionals and are working on an application for professional animators. The stockholders in AnimatEASE Corp. in addition to Richard Abbot, John Baker, and James Charles are Dare to Be Great (DBG) Corp., a venture capital group consisting of 10 wealthy shareholders with several years experience in venture financing, three well known companies that produce animated films, and a fourth company in the business of producing animated commercials for the principal TV networks. The non-professional version of the application has received rave reviews from several PC magazines. AnimatEASE entered into an agreement a year earlier with McThaw Education Pubishers under which McThaw has the exclusive right to market the application to universities and other educational institutions and a contract with Atomzon.com, which has a non-exclusive license to market the application on the Internet. The company realized $10 million in total revenues during its last fiscal year, which is the first year in which it had any revenues, but also incurred a net loss of $20 million in the same year. DGB and the other private investors noted above have invested a total of $50 million in the company and own 40% of the outstanding stock, the balance being owned in equal amounts by Richard Abbot, John Baker, and James Charles.. Abbot is the President and Chief Executive Officer of AnimatEASE Corp; Charles is a Vice-President and Chief Operation Officer, and Baker is a Vice-President and Chief Financial Officer. Charles is the nerd with a Ph.D. in Computer Graphics who is largely responsible for developing the software. Abbot is a Harvard MBA and Baker is a CPA who cut his accounting teeth with a national accounting firm. Substantial additional capital is needed in order to develop the professional version, to continue to upgrade the non-professional version, and to market it directly through an extensive advertising campaign and through a recently organized sales force that will focus on potential resellers such as CompUSA. The company maintains a site on the Internet with several features including: Press Releases, Reviews of the Product, List of its investors, Statement of its “mission”, Employment opportunities at Animatese, Description of the product, Place your order for Animate 4.0. The company six months ago engaged a public relations firm (Easy & Associates (E&A)) that is responsible for designing and placing its advertising in PC magazines, for the content of its Internet site, for press releases and the like. Red Herring magazine included the company two years ago among its fifty outstanding private companies and AnimatEASE republishes the Red Herring description of the company on its Internet site: An all hands meeting to discuss going public is scheduled at which the company's officers, in house counsel, and outside counsel (members of the class) are present. The officers of the company under pressure from DBG and with the concurrence of the Board of Directors have made the decision to go public. The company has been in discussion with an investment banking firm that is prepared to act as lead underwriter. Richard Abbot notes that all the leading investment banking firms have Internet sites and the suggestion is made that a letter be put together with the assistance of E&A featuring the company's selection as one of the leading private technology companies and requesting a meeting to discuss an IPO. Outside counsel presented for future reference a bullet list of matters that the company should consider as it proceeds down the public offering road. The list included the following: 1. Blue-sky qualification. States now have coordinated equity review for equity offering. But that still brings into play a number of so called "merit requirements" that can be arbitrary. 2. Counsel suggest that if the company lists its stock on Nasdaq, as the prospective underwriter has suggested in that event blue sky registration will not be a problem. NSMIA (National Securities Market Improvement Act) pre-empts state securities regulation if the stock is listed on a stock exchange the SEC agrees meets certain criteria and the Nasdaq Stock Market now meets those requirements See Nasdaq Listing Requirements. See Securities Act § 18(a)(1)-(2). 3. The offering should be of sufficient size to assure that there is no question that the company meets the Nasdaq Stock Market criteria for listing as a Capital Market security. 4. The underwriting arrangement has to be reviewed by the NASD's Corporate Finance Department to determine that the underwriting compensation is fair under the Corporate Finance Rules. This is more complex than appears on the surface and will have to reviewed. 5. The Commission's "Plain English" rules have to be taken into account in preparing the prospectus. 6. The filing will have to be made electronically in accordance with Regulation S-T rules governing the making of filings via the EDGARFiling website (https://www.edgarfiling.sec.gov). The company should acquire enough expertise in using EDGARLink so that it will at least be able to make in house routine filings under the '34 Act. Outside counsel has the ability of making EDGAR filings for them, but the financial printer will probably assume this task in connection with the IPO. 7. The company will want to register the common stock under the Exchange Act. This is necessary for the stock to be listed on the Nasdaq Stock Market. The most efficient way of doing this is to do it concurrently on Form 8-A, which will permit the Exchange Act registration to become effective concurrently with the effectiveness of the Securities Act registration statement. 8. The company on completion of the public offering will be a public company, subject to the reporting (including annual report to shareholders) and other requirements of the Exchange Act. 9. The company will have to take into account the provisions of Sarbanes-Oxley relating, among other things, corporate governance, disclosure controls, internal control over financial reporting (ICFR), most of which will have to be in place almost the moment it becomes a public company. 10.The officers and directors and 10% beneficial shareholders will have to file a Form 3, which will require that each has necessary EDGAR access codes, which can be obtained only by applying through the EDGAR Filer Management website (https://filermanagement/edgarfiling/sec.gov). After access codes are obtained the Form 3s have to be prepared and transmitted on the website (https://www.onlineforms.edgarfiling.sec.gov) The above is mentioned only so everyone will be aware of the big picture as the public offering process gets underway. Outside counsel stresses the fact that as of this moment the company might be deemed "in registration." He is concerned about the company's Internet site and the information included there that might be deemed an offer of sale as to the underlining security. Let us take a quick look at Section 5 and Section 2. See Securities Act § 5 and Securities Act § 2(a)(3). Question 1. In plain English, what does Section 5(c) preclude? Consider in this context Securities Act 2(a)(3)? Queston 2 What does Securities Act § 5(b) preclude?. Add to the mix Securities Act §2(a)(10) -- definition of prospectus--Securities Act § 10(a)Getting way ahead of ourselves, but a registration statement conceptually becomes effective 20th day after filing unless Commission accelerates. Each filing of an amendment establishes new filing date for this purpose. In practice, particularly with respect to IPO, will become effective when the process of staff comments and amendments has run its course, which may be 3 or 4 or more months. Include delaying amendment with each filing until staff indicates is ready to declare it effective and at that point request acceleration of the effective date. At this point, filing of registration statement is in contemplation, but have not entered into letter of intent with prospective underwriter. Counsel suggests that company may be deemed "in registration" and must take that into account; particularly with respect to its Internet site. Question 3. When is a company "in registration"? See Securities Act Release 5180, FN1. Release No. 33-5180--Guidelines for Release of Information by Issuers Whose Securities are in Registration Counsel refers to "gun jumping" and makes repeated references to Arvida. Question 4. What did the SEC hold in Arvida constitutes a violation of Section 5(c)? As to what constitutes solicitation of an offer to buy? Outside counsel stresses that the Securities Offering Reform rules that became effective December 1, 2005 go beyond Rule 135 and alleviate the gun jumping problem somewhat, but not much for an IPO. Rule 163A and Rule 169 will be some help. He suggested all players take a peek. Question 5: What did Rule 135 permit during the pre-filing period? Question 6. What does Rule 163A provide in this respect? Question 7. What does Rule 169 provide in this respect. Richard Abbot becomes very defensive, the company hired Easy & Associates (E&A) public relations six months ago and paid them $100,000 to redo its Internet site with a view to building the company's profile so as to attract top of the line resellers. Richard Abbot is adamant that the site is going to to include its press releases, including the Red Herring top 100 press release that was the first to go up on the Web site. E&A has also arranged interviews for Abbot with the Business Editor of the Denver Post to discuss the company's plans for the future. You are a participant in the discussions described above. Question 8 What is your advice to the company with respect to continuing to include the Red Herring Press Release on the website? Consider Carl M. Loeb, Rhoades (Arvida). Question 9. What is your advice to the company with respect to sending a letter to prospective underwriters re underwriting the contemplated offering? Consider Securities Act §2(a)(3) Question 10. What about an Interview of the CEO with the Denver Post? Consider GOOGLE turns Playboy So, what's new? See the Webvan Story WebMD Story SOR provides for a media free prospectus, which we will consider in due course. However, it would not come into play during the pre-filing period. The following two Items represent the old guidance--read them at your leisure. Some of same is preserved in SOR, but in the form of specific rules. Release No. 33-3844--PUBLICATION OF INFORMATION PRIOR TO OR AFTER THE EFFECTIVE DATE OF A REGISTRATION STATEMENT Release No. 33-5180--Guidelines for Release of Information by Issuers Whose Securities are in Registration |